Oct. 28, 2005: THE STATE OF THE REGION: DEFENSE BUOYS LOCAL ECONOMY

Hampton Roads' economy continues to grow at a pace faster than the national average and faster than in any period in the past 35 years except during the defense build-up of the Reagan era.Despite being a smaller part of the overall economy than it was in the '70s and '80s, defense spending was still responsible for more than 70 percent of the region's economic growth over the past five years. The period of expansion compares well against any time over the past half-century, said James V. Koch, economics professor and president emeritus at Old Dominion University, who outlined the annual State of the Region report Thursday.

While the region still is buoyed by that federal spending, it does not spell out a clear future for the next few years. The outcome of the BRAC process remains unknown, and previous booms in defense spending -- such as during the Vietnam and Cold wars -- were followed by periods of job downsizing.

Hampton Roads' gross regional product has grown 24 percent since 2001, while national gross domestic product has grown roughly 2.7 percent per year during that time. The only time the region saw greater growth was from 1983 to 1988, and period that coincided with the defense build-up of the Reagan administration.

"This measures up against any period in Hampton Roads, certainly since World War II," Koch said, speaking at the Constant Center in Norfolk. But, he added, "At some point defense expenditures are going to decelerate, and then we're going to be very sensitive to those changes."

The report also looked at questions surrounding the BRAC decision on Naval Air Station Oceana, the future of the modeling and simulation industry in Hampton Roads and a curious fallout from cities' push to lure boaters by lowering boat taxes.

DEFENSE

The bread and butter of the local economy, defense-related spending now accounts for roughly 36.2 percent of the gross regional product, the report said. It made up as much as 55 percent in 1970, and as little as 29 percent in 2000.

The economy is more diversified now, but previous booms in defense spending preceded backsliding in job gains. From 1969 to 1976, the region lost 26 percent of its military jobs. After the Cold War ended, 1989 to 1998 saw a 24.5 percent decline in military jobs.

Still, the region has not seen a year of negative economic growth since 1975. Koch said that a downturn in defense expenditures would shake up, but likely not greatly upset, the local economy.

"This has happened before and we've dealt with it," he said. "We can deal with it again."

The report was compiled before the mayor of Jacksonville, Fla., withdrew his support for the proposal to move the jets from Oceana to Cecil Air Field.

But it forecasts what the effects of such a move would have on Hampton Roads, and estimates a loss of $1.6 billion to the gross regional product -- about 2.5 percent -- if nothing were to replace the lost jobs and economic activity.

MODELING

Koch described Hampton Roads' fledgling modeling and simulation economy as a bright spot but also a question mark.

The technological innovations in place at Suffolk's Joint Training, Analysis and Simulation Center and ODU's Virginia Modeling, Analysis and Simulation Center are the region's best hope for spawning a new economy rooted in the tech industry, Koch said.

The report said the region gained 5,000 computer- and technology-related jobs over the past year, many of which were tied to the Suffolk modeling center.

Koch said he thinks modeling and simulation will be a strong industry in the future. But so far the activity at the two publicly-funded centers has not spun off a great number of private sector businesses that would make modeling and simulation a factor here, like government-sponsored research did with the technology corridor in Northern Virginia.

"Will these and similar private-sector jobs remain if and when Department of Defense expenditures stagnate?," the report says. "If the answer is no, and private-sector modeling and simulation efforts disappear, then our region will be back at the proverbial technology starting gate."

"If we begin to get those spin-offs," Koch said, "then we'll have hit the jackpot."

Koch said the lack of tech start-ups surrounding the modeling centers is largely due to the lack of a major public research university in the area. Areas like Austin, Texas, and the Research Triangle in North Carolina have reaped economic rewards from private investment pegged to public institutions there. But right now, Hampton Roads doesn't have that.

"We're not in the top 100 (in rankings of research activity), nor are we anywhere close," Koch said. "Within the Commonwealth, we haven't been investing in those kinds of things and we haven't been attracting those high-end, clean, attractive kinds of jobs."

BOAT TAXES

Koch and the ODU economists also studied how cities in the region competed with each other to lower boat taxes with the intent of drawing more boaters to their respective city.

The idea was that lower boat taxes would lure boaters to dock in a city, and then spend money there and offset the loss of boat-tax revenue with greater sales tax income. However, boaters haven't seemed to pay attention, or care.

Hampton, Norfolk, Portsmouth and Virginia Beach have all lowered their boat taxes to either one cent or a fraction of a cent on each $100 of value.

Meanwhile the number of boats docked in Hampton Roads cities and counties has decreased 1.5 percent from 1998 to 2004. *

ON THE WEB The State of the Region report is online at: http://www.odu.edu/bpa/forecasting/sors.shtml